IATA downgraded its 2018 profit forecast for the global airline industry, projecting airlines will collectively earn $33.8 billion this year, down 12% from the $38.4 billion predicted in December 2017.

Fuel costs are much higher than IATA expected when it made its previous forecast six months ago, with Brent Crude oil prices averaging more than $76 per barrel as of June 4. Fuel costs are “quite a big challenge and that’s the principal reason we’re forecasting a squeeze on profitability in 2018,” IATA chief economist Brian Pearce told reporters during a briefing at the IATA AGM.

Nevertheless, Pearce urged viewing the latest forecast in context. IATA still believes airlines globally will generate more revenue in 2018—$834 billion, up 10.7% from $754 billion in 2017—than in any year in the industry’s history.

“We are expecting it to be a record year” for revenue, Pearce said, adding: “We are expecting to see revenue of over $800 billion, driven by the very strong air travel environment … So that’s providing some offset to the costs. But unfortunately, cost pressure is rising so quickly, we expect costs to rise faster than revenue and that is leading to the squeeze.”

But a restructured airline industry, which is using its assets much more efficiently, is withstanding the fuel price spike relatively well, Pearce said. “In the first quarter of this year, airline profits were stable at high levels and travel was growing at a record level,” he said. “Airlines are still doing well.”

But he cautioned: “I do think the industry faces some pretty severe challenges, and indeed we’re expecting lower profits this year and slower growth in passenger traffic and slower growth in cargo demand, so there is clearly some damage from high fuel prices. But [profits are] coming down from a high level.”

IATA’s latest forecast assumes Brent Crude per barrel oil prices to average $70 for the full-year 2018, which would mark a 27.5% increase over 2017. Fuel costs will account for 24.2% of airlines’ costs in 2018, up from 21.4% in 2017, according to IATA.

IATA foresees a slight slowdown in air travel demand growth, with passenger traffic expected to rise 7% year-over-year (YOY) in 2018, down from 8.1% YOY growth in 2017, but still well above the 20-year average of 5.5% annual passenger traffic growth.

“We still see growth prospects as very strong,” Pearce said. “Last year, we saw the number of city pairs connected reach 20,000 for the first time, and this year we expect it to exceed 21,000.”

Air cargo demand is projected by IATA to grow 4% YOY in 2018, more than cut in half from last year’s robust 9.7% growth. Pearce said a “restocking cycle” that drove last year’s growth has come to an end. But, he noted, this year’s expected growth rate remains in line with air cargo’s 20-year growth rate trend and IATA continues to be “positive” on cargo.

In the background of the new global airline forecast released at the IATA AGM is concern among airline executives gathered in Sydney over growing global trade tensions, particularly between the US and traditional allies such as Canada and the European Union.

“There is a lot of uncertainty at the moment with tariff wars and fuel prices rising, so business confidence has taken a knock,” Pearce said. “There has been a trade problem really for the last 10 years. We had been seeing a creeping protectionism of the soft kind, and that has now broken out into full tariff wars … The fear is: What happens if this escalates?”

IATA DG and CEO Alexandre de Juniac, speaking to reporters at the AGM, said trade tensions “are bad news” for the airline industry, adding: “For the moment, we haven’t faced any significant decline in passengers or capital based on trade wars or protectionist barriers. But if it continues, it will happen.”

Aaron Karp/Aviation Daily, aaron.karp@informa.com